Asymmetries in Business Cycles and the Role of Oil Production

Innovations to total factor productivity are thought to be an important determinant of business cycles. We investigate whether innovations to quarterly HP-filtered Solow residuals are symmetric over time for eleven OECD countries. Our model modifies classical stochastic frontier analysis to accommodate the strong serial correlation in macro data. The results have implications for whether business cycles are symmetric, with the economy responding in a linear way to normal iid shocks, or asymmetric with recessions fundamentally different from booms. Likelihood ratio tests imply that nine of eleven countries have significant asymmetries. We also consider structural differences in economies with and without asymmetries and find that asymmetries tend to be stronger the less oil production per worker in the economy. Non-linear conditioning of the HP-filtered Solow residual on the relative price of oil removes or reduces asymmetries for most countries which otherwise exhibit them, implying that much asymmetry is due to the response of the economy to oil prices.